Egypt finance chief knocking down subsidies

Feb. 6, 2014
|

Egyptians walk past a banner bearing a portrait of Army chief Field Marshal Abdel Fatah al-Sisi, titled "The President", in Cairo on Thursday. Egypt's army said a Kuwaiti newspaper "misinterpreted" comments by its chief that he will run for the presidency, saying he will make an announcement directly to the Egyptian people. / Khaled Desouki, AFP/Getty Images

by Sarah Lynch, Special for USA TODAY

by Sarah Lynch, Special for USA TODAY

The elected president, Mohammed Morsi, had been ousted by the military following days of anti-government protests by millions of Egyptians. Dozens were dead, activists were being swept into prison, and the generals promised to fix a no-growth economy that was making the unrest worse.

In that environment, Egyptian economist and politician Ahmed Galal was named the country's minister of finance.

In an interview with USA TODAY, Galal says the nation's interim leaders are trying to pull the economy out of its slump and smooth challenges ahead of presidential and parliamentary elections expected to be held this year.

"From the economic front, we are trying to ease the problems, do some policy adjustments and pave the way for more sustainable development down the road," Galal said. "We are trying to make it easier for the new government in dealing with the economy."

Egypt's interim government, which will remain in place until elections are held, was appointed with the approval of the military six months ago. It inherited economic problems rooted in three years of political unrest that began with the 2011 uprising against longtime dictator Hosni Mubarak.

Over the past three years, the tourism industry precipitously declined, leading to a drop in foreign currency reserves. Unemployment rose and investment drastically slowed. And last summer the budget deficit reached 14% of GDP.

In 2013, the interim government introduced a $4.3 billion stimulus package. Supported by pledges of more than $12 billion from Gulf sheikdoms, Egypt will soon announce details of a second stimulus package aimed at firing up the economy, Galal said.

Yet the most important effort to ease economic challenges for future leaders, Galal said, is a twin reform initiative that will deal with energy subsidies, which eat about one-fifth of the nation's budget. Several economists say Egypt's reliance on subsidies to bring down the cost of goods props up failing industries and stymies innovation, and is a chief reason why foreign investors have shied away from the country.

Galal says authorities will gradually cut energy subsidies â?? possibly over the next five to seven years â?? while simultaneously creating jobs and improving education and health services to empower the nation's poor.

"You don't want to shock the economy. You want to give people time to adjust," Galal said, noting subsidy cuts will start before the interim leaders leave office. "You don't want to move to zero subsidy in no time."

Officials also want to change the way the administration taxes and spends to reduce pressure on the budget, Galal said.

"This government is an interim government â?? it's a foundational government," Galal said. "We want to get the economy from point A to point B â?? not the economy, the country as a matter of fact."

Egypt's authorities seem well aware that the economic troubles could turn into serious political problems in a country where mass protests have forced the overthrow of two governments.

There is a risk that Egyptians will grow frustrated with authorities if they don't see economic progress. But reforms necessary for improvement â?? such as subsidy cuts â?? could prove highly unpopular.

And it remains unclear how effective the current and proposed reforms will be.

"The endemic problems of the Egyptian economy are certainly not going away anytime soon and to address them, a lot of unpopular policies will have to be enacted," said Tarek Radwan, associate director for research at the Atlantic Council's Rafik Hariri Center for the Middle East.

That could prove problematic for leaders such as Field Marshal Abdel Fattah al-Sisi, who will likely be the nation's next president if he decides to run in the elections.

"Any Egyptian government is going to see some backlash," Radwan said. "They may be able to weather the storm with the Gulf funds that are coming in. But â?¦ how consistent will that funding be?

"That remains to be seen and when that dries up, whatever government is in power is going to be facing a very angry population."

Support from the Gulf is only a temporary solution, Galal said. He believes the Egyptian economy is strong and diversified enough to eventually sustain itself.

The next government will benefit from long-term impacts of the stimulus packages and, if security is restored, from resumption of tourism and investment, he said.

The restoration of security will be critical to whether tourists return in the numbers Egypt once saw, and whether investors have confidence enough to put their money down in the country.

Attacks from an Islamist insurgency are growing in the nation's eastern region. Last month saw four bomb blasts in the capital of Cairo. Protests across Egypt by government opponents continue, often devolving into violent clashes.

Egypt's Minister of Industry and Foreign Trade Mounir Fakhry Abdel Nour is on an international mission to promote trade and investment in Egypt. He visited Paris and is on his way to Brussels, Berlin, London, Moscow and Washington where he hopes to expand trade relations between Egypt and the United States. He will be meeting businessmen and the Chamber of Commerce while in Washington.